Business Context and Reporting Period
Company: comScore, Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: June 30, 2008
Business Overview: comScore provides a digital marketing intelligence platform, offering insights into consumer behavior through a panel of over two million Internet users. The company delivers data via subscription-based products (Media Metrix, Marketing Solutions) and project-based services. A significant strategic development during this period was the acquisition of M:Metrics, Inc. on May 28, 2008, to expand capabilities in mobile marketing intelligence.
Key Financial Metrics
| Metric (in thousands) | Three Months Ended June 30, 2008 |
Three Months Ended June 30, 2007 |
Six Months Ended June 30, 2008 |
Six Months Ended June 30, 2007 |
|---|---|---|---|---|
| Revenues | $28,750 | $20,809 | $55,120 | $39,490 |
| Net Income | $1,710 | $1,240 | $4,241 | $2,780 |
| Net Income Available to Common Stockholders | $1,710 | $317 | $4,241 | $972 |
| Diluted EPS (Common) | $0.06 | $0.00 | $0.14 | $0.00 |
| Operating Cash Flow (6 Months) | $24,489 (2008) vs $7,659 (2007) | |||
| Cash and Cash Equivalents (End of Period) | $40,159 | |||
| Total Assets | $173,737 | |||
| Total Liabilities | $62,739 |
Margins (Six Months Ended June 30, 2008):
- Gross Margin: 73.0% (Revenue $55.1M / Cost of Revenue $14.9M)
- Operating Margin: 12.0%
- Net Profit Margin: 7.7%
Material Changes vs. Prior Period
- Revenue Growth: Revenues increased 38% year-over-year for the quarter and 40% for the six-month period. Growth was driven by increased sales to existing customers, new customer acquisition, and the contribution from the M:Metrics acquisition.
- Profitability: Net income available to common stockholders improved significantly, rising from $317,000 in Q2 2007 to $1.71 million in Q2 2008. This improvement is partly due to the elimination of accretion charges on redeemable preferred stock which occurred after the 2007 IPO.
- Acquisition Impact: The acquisition of M:Metrics resulted in a preliminary purchase price of approximately $46.0 million, primarily recorded as goodwill ($41.2 million) and intangible assets ($10.2 million). This significantly increased total assets and goodwill on the balance sheet.
- Expense Increases: Selling and marketing expenses rose 42% (quarterly) and General and Administrative expenses rose 83% (quarterly), largely due to public company compliance costs, increased headcount, and the integration of M:Metrics.
- Investment Impairment: The company recorded a $386,000 impairment charge related to auction rate securities deemed to have an other-than-temporary decline in value.
Guidance, Outlook, Risks, and Unusual Items
Management Commentary & Outlook:
Management expects revenues to continue growing due to international expansion and new product launches. However, they anticipate that interest income may decrease in future periods due to lower interest rates and reduced cash balances following the M:Metrics acquisition. The company expects operating expenses to increase as a public company and to support growth initiatives.
Unusual Items:
- Auction Rate Securities: $4.4 million of investments are classified as long-term due to liquidity issues in the credit markets. Five securities with a par value of $5.1 million failed their most recent auctions. A $386,000 impairment was recognized.
- Deferred Rent: Significant increases in deferred rent ($7.9 million increase in operating cash flow) resulted from landlord allowances for new office leases in Reston and Chicago.
Risks and Contingencies:
- Liquidity Risk: Uncertainty regarding the recovery of auction rate securities and the timing of liquidity restoration.
- Customer Concentration: Microsoft Corporation accounted for approximately 13% of total revenues in 2007.
- Panel Maintenance: Risks associated with maintaining the size and scope of the consumer panel, including privacy concerns and "spyware" classifications.
- Valuation Allowance: The company maintains a $24.4 million valuation allowance against deferred tax assets. Future reversals could materially impact results.
Key Facts for Investor Verification
- Acquisition Integration: Verify the financial performance and integration progress of M:Metrics, which contributed to revenue but also increased operating costs and goodwill.
- Investment Portfolio Liquidity: Assess the status of the $4.4 million in auction rate securities and the potential for further impairment charges if credit ratings of issuers or insurers deteriorate.
- Deferred Tax Assets: Monitor the utilization of the recognized deferred tax assets and the potential for future valuation allowance adjustments, which could significantly impact net income.
- Customer Concentration: Track revenue dependency on top customers, specifically Microsoft, and the impact of any contract changes.
- Public Company Costs: Evaluate the sustainability of the sharp increase in General and Administrative expenses related to public company compliance and whether these costs will stabilize.